Professional Documents
Culture Documents
Financial Forces
McGraw-Hill/Irwin
International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
11-3
Fluctuating Currency Values
11-4
Foreign Exchange Terminology
11-5
Foreign Exchange Quotations
Exchange Rates
Foreign currency X’s per US$ rate can be computed
from the reciprocal of the US$ equivalent rate of
currency X (and vice versa)
11-6
Exchange Rate for June 19 and June 16,
2006
11-7
Exchange Rates
Spot rates
The exchange rate between two currencies
for delivery within two business days
Forward currency market
Trading market for currency contracts
deliverable 30, 60, 90, or 180 days in the
future
Forward rate
The exchange rate between two currencies
for delivery in the future, usually 30, 60, 90,
or 180 days
11-8
Exchange Rates
Trading at a premium
A currency’s forward rate quote is stronger than
the spot rate
Trading at a discount
A currency’s forward rate quotes is weaker than
the spot rate
Premium or a discount depends on the
expectations of the world financial community,
businesses, individuals, and governments
about what the future will bring
11-9
Exchange Rates
Cross Rates
Currency exchange rates for trading directly
between non-U.S. dollar currencies
Bid price
Price offered to buy
Ask price
Sales price
11-10
Influences of Exchange Rate Fluctuation
Interest rates
Inflation
Expectations
11-11
Exchange Rate Fluctuation
• Monetary policies
– Government policies that control the amount of
money in circulation and its growth rate
• Fiscal policies
– Policies that address the collecting and spending of
money by the government
• Law of one price
– Concept that in an efficient market, like products
will have like prices
• Arbitrage
– The process of buying and selling instantaneously
to make profit with no risk
11-12
Exchange Rate Fluctuation
• Fisher effect
– The relationship between real and nominal interest
rates: the real interest rate will be the nominal
interest rate minus the expected rate of inflation
• International Fisher effect
– Concept that the interest rate differentials for any
two currencies will reflect the expected change in
their exchange rates
• Purchasing Power Parity (PPP)
– Theory that predicts that currency exchange rates
between two countries should equal the ratio of the
price levels of their commodity baskets
11-13
Exchange Rate Forecasting
11-14
Exchange Rate Forecasting
Fundamental approach
Exchange rate prediction based on
econometric models that attempt to capture
the variables and their correct relationships
Technical analysis
An approach that analyzes data for trends
and then projects these trends forward
11-15
Currency Exchange Controls
11-16
Currency Exchange Controls
11-17
Tariffs
• Tariffs
– Taxes, usually on imported goods
– May be ad valorem, specific, compound, or
variable
11-18
Taxation
Income tax
• Direct tax on personal and corporate income
Value-added tax (VAT)
• A tax charged on the value added to a good as it
moves through production from raw materials to
final purchaser
Withholding tax
• Indirect tax levied on passive income that the
corporation would pay out to non residents
11-19
Corporate Tax Rates
11-20
Inflation
11-22
Inflation and the International Company
11-23
Inflation and the International Company
Discourage lending